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Nonprofit Credit Counselors vs. Debt Relief Companies

Last Updated: April 27, 2023
5 min read

Key points about: the differences between a nonprofit credit counselor and a debt relief company

  1. Nonprofit credit counselors typically offer free and low-cost services, while debt relief companies may charge high fees.

  2. Nonprofit credit counselors offer personalized financial advice that helps you create a plan to repay your debt and establish better habits moving forward.

  3. Debt relief companies may use a generalized approach to settling your debt, with little focus on your overall financial health.

Reputable nonprofit credit counseling agencies may offer credit counselors who are trained and certified in consumer credit, debt management, and other money matters. In contrast, many debt relief companies may focus on making a profit rather than helping consumers better manage their financial lives.

The difference between nonprofit credit counselors and debt relief companies is important to understand if you’re seeking help managing unsecured debt, such as credit cards, personal loans, student loans, or even medical bills. Read on to learn what you need to know before reaching out for assistance.

How can a nonprofit credit counselor help you?

Nonprofit credit counselors may offer more accessible and comprehensive solutions to your money matters than a debt relief company. Here are some of the benefits of working with a nonprofit credit counselor:

  • Free counseling services: Many nonprofit credit counseling agencies offer their financial counseling services free of charge and with no obligations.
  • Low-cost debt management plan: Nonprofit credit counseling agencies can also help you develop a debt management plan (DMP) for a low monthly cost. It’s a good idea to review all your options and understand exactly what a DMP offers before agreeing to the terms.
  • Highly qualified support: Nonprofit credit counselors typically undergo intensive training and must pass stringent tests to get certified to counsel consumers on financial matters, such as credit card debt, mortgages, student loans, and bankruptcy.
  • Holistic financial support: A credit counselor will work with you to address your debt and help you figure out why you got into debt and how to develop better financial habits moving forward. 

What is the process of working with a nonprofit credit counselor?

Most nonprofit credit counseling agencies offer counseling online, by phone, or in person.

A nonprofit credit counselor typically reviews your overall financial picture, including income, bills, debt, and other obligations such as child support. Taking this information into account, the counselor will help you decide on a plan to deal with your debt. The counselor can also help you create a realistic household budget that includes debt repayment.

If you qualify, your credit counselor may offer a debt management plan, which typically helps lower the interest you’ll pay and establishes a reasonable timeline for repayment. With a DMP, you’ll make monthly payments to the agency plus a small fee, and the agency will pay your creditors on your behalf.

If you enroll in a debt management plan (DMP) with a nonprofit credit counseling agency, it may result in closing your unsecured credit accounts. Closing accounts can lower your credit score. But the benefit of a DMP is that you’ll still make on-time, acceptable payments to your creditors. The same can’t be said for debt relief companies that may stop payments to your accounts while negotiating your debt settlement—potentially causing more significant damage to your credit.

You may need to do some legwork to ensure a nonprofit credit counseling organization is legitimate. It’s important to ask questions about credit counseling services to choose a reputable agency. 

What you should know about debt relief companies

A debt relief company is often a for-profit business that charges consumers for services related to debt resolution. Debt relief companies may also be called debt settlement or debt consolidation companies and may vary in terms of what they can achieve.

These companies may have you open an escrow account with them, to which you’ll make monthly payments. Typically, you’ll pay into the escrow account and cease payments to your credit cards or other loans. Once you’ve paid a certain amount into the account—determined by the debt relief company—one of their representatives will reach out to your creditors to make settlement offers. There’s no guarantee that your creditors will accept those offers, which may leave you in a difficult financial situation. Debt settlement can take many months. And after a certain amount of time goes by, the accounts could be charged off by the creditors and lenders, which is considered a negative event in your credit history.

Did you know?

Some credit issuers, including Discover®, may offer payment programs to help manage debt. For that reason, you may want to reach out to your creditors directly to discuss your options for repayment if you’re struggling.

Learn More About Credit Cards

Keep in mind that the consolidation offered by debt relief companies is different from consolidating your debt through a financial product such as a personal loan, credit card balance transfer, or home equity loan from your bank or credit union. These forms of debt consolidation leave you solely in charge of managing your debt, and you may need a good credit score to qualify. By signing an agreement with a debt relief company, you usually transfer power of attorney to the company, allowing them to make decisions about your accounts going forward.

Weighing your debt settlement options

Still not sure where to turn? Perhaps an example will be helpful: Say Sally Smith owes $10,000 across five credit cards. She goes to a debt relief company that charges a fee of 25% of the total amount of debt settled. If the debt relief company can get her creditors to settle for 50% of what Sally owes, she may have to come up with $5,000 quickly to pay her creditors, on top of paying a $1,250 fee to the debt relief company.

In contrast, if Sally signed up for a debt management plan through a credit counseling agency, she might pay a small set-up fee and a $30 monthly fee for the plan. However, the non-profit agency may negotiate lower interest rates and fee waivers with her creditors—possibly resulting in manageable monthly payments and more savings over the course of her repayment than the cost of debt settlement with a debt relief company.


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